Business appraisers try really hard to be objective in order to produce a realistic and well supported business valuation result. So can a business appraisal be objective and yet differ from another valuation of the same company by a different appraiser?
The answer is yes. Why? Because business valuation is always about the future. So your result would depend on the future business outcome you include in your assumptions. But since no one can guarantee what happens in the future, there is a degree of risk that things could turn out differently.
To handle this uncertainty, you could assign a probability to the future scenario you assume in your valuation. Let’s say the appraisal is done for a company looking to attract outside investment. To put your best foot forward, you make the assumption that the new product line currently in the works will hit the target and capture a large share of the market. This will in turn drive your business valuation result. To pick a number, you could determine that the company’s value is $10 million based on this assumption.
Now a key investor hires another appraiser who makes a different and far more conservative assumption that the new product line will be a flop. As a result, the value is zero.
Objective appraisals based on different assumptions
Both appraisals are objective but the results they produce are very different. How reasonable and supportable are these assumptions? The readers of the valuation report must decide for themselves.
For example, you may be convinced the company’s products have great potential and are sure to succeed in the market. As a result, the $10 million value would sound like the right number. On the other hand, you may feel the market is moving in a different direction so the product is bound to fail. Then the zero value would appear more reasonable.
Or you may hedge your bets and decide that the most likely outcome falls somewhere in between. And this could lead to a different set of assumptions and yet another valuation result.